Friedman, shareholder primacy and beyond CSR

“There is one and only one social responsibility of business-to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

~Milton Friedman~  US economist (1912-2006)

That statement would be unchallenged in mainstream business for almost 3 decades until 1996 when something almost heretic was suggested in a seminal paper about doing business.differently

“The P-CED concept is to create new businesses that do things differently from their inception, and perhaps modify existing businesses that want to do it. This business model entails doing exactly the same things by which any business is set up and conducted in the free-market system of economics. The only difference is this: that at least fifty percent of profits go to stimulate a given local economy, instead of going to private hands. In effect, the business would operate in much the same manner as a charitable, non-profit organization whose proceeds go to local, national, and international charities. Non-profits, however, are typically very restricted in the type of business they can conduct. In the United States, all non-profits must constantly pay heed that they are not violating those restrictions, lest they suffer the wrath of the Internal Revenue Service. For-profits, on the other hand, have a relatively free hand when it comes to doing business. The only restrictions are the normal terms and conditions of free-enterprise. If a corporation wants to donate to its local community, it can do so, be it one percent, five percent, fifty or even seventy percent. There is no one to protest or dictate otherwise, except a board of directors and stockholders. This is not a small consideration, since most boards and stockholders would object.  But, if an a priori arrangement has been made with said stockholders and directors such that this direction of profits is entirely the point, then no objection can emerge. Indeed, the corporate charter can require that these monies be directed into community development funds, such as a permanent, irrevocable trust fund. The trust fund, in turn, would be under the oversight of a board of directors made up of corporate employees and community leaders.”

“How can such a thing work? Where would the initial venture capital come from? This capital in each case can come from each community if available, or from sponsoring communities or funding organizations. In Chapel Hill, North Carolina, for example — where P-CED was born in 1997 — multi-millions of dollars are donated each year to charities, after which the money is typically given away, spent, and gone. Two churches adjacent to the university campus recently raised in excess of four million dollars to improve their buildings. (As a counterbalance, a third church chose to forego its own plans for a building and donated its entire building fund to a badly-needed support program for the elderly.) If twenty percent were set aside to fund a “P-CED enterprise”, that money would never go away, but would instead grow as it should in business. Once the seed capital is available and the business plan implemented, everything after that goes the normal way of business. Employees are paid according to the local pay scales, receive benefits, and so on. They would also enjoy profit-sharing directly for themselves from a total pool of ten percent of profits. Forty percent of profits would be rolled back over into the company for growth. The remaining fifty percent would go to the trust fund. Thus, aside from the final direction of profits, everything is exactly the same as with any other business enterprise.”

Following a proof of concept project in Russia, in 2004 this ‘profit for purpose’ concept was introduced to the UK as a ‘guarantee company’ with a  business plan which suggested that capitalism was an insufficient economic model, saying:  :

“Dealing with poverty is nothing new. The question became ‘how does poverty still exist in a world with sufficient resources for a decent quality of life for everyone?’ The answer was that we have yet to develop any economic system capable redistributing finite resources in a way that everyone has at minimum enough for a decent life: food, decent housing, transportation, clothing, health care, and education. The problem has not been lack of resources, but adequate distribution of resources. Capitalism is the most powerful economic engine ever devised, yet it came up short with its classical, inherent profit-motive as being presumed to be the driving force. Under that presumption, all is good in the name of profit became the prevailing winds of international economies — thereby giving carte blanche to the notion that greed is good because it is what has driven capitalism. The 1996 paper merely took exception with the assumption that personal profit, greed, and the desire to amass as much money and property on a personal level as possible are inherent and therefore necessary aspects of any capitalist endeavour. While it is in fact very normal for that to be the case, it simply does not follow that it must be the case.

Profits can be set aside in part to address social needs, and often have been by way of small percentages of annual profits set aside for charitable and philanthropic causes by corporations. This need not necessarily be a small percentage. In fact, there is no reason why an enterprise cannot exist for the primary purpose of generating profit for social needs — i.e., a P-CED, or social, enterprise. This was seen to be the potential solution toward correcting the traditional model of capitalism, even if only in small-scale enterprises on an experimental basis.”

In 2005, with an article describing the concept of a social business enterprise, Muhammad Yunus says:

‘Suppose we postulate a world with two kinds of people, both one-dimensional, but having different objectives. One type is the existing type, i.e. profit maximizing type. Second type is a new type, who are not interested in profit-maximization. They are totally committed to make a difference to the world. They are social-objective driven. They want to give better chance in life to other people. They want to achieve their objective through creating/supporting sustainable business enterprises. Their businesses may or may not earn profit, but like any other businesses they must not incur losses. They create a new class of business which we may describe as “non-loss” business.’

The way to identify such business, he suggests is through a social business competition.

Grameen then goes on to establish a partnership with Danone, a business with a bottom line of removing children from malnutrition. As I’ve learned only recently, it was established by agreement of Danone shareholders who consented to this social objective.

Meanwhile P-CED continued its efforts in Eastern Europe and in 2006 releases a microeconomic development and social enterprise strategy described as a ‘Marshall Plan’ for Ukraine. Published online in 2007, it is  ‘a nil overal cost’ approach, described as a ‘Marshall Plan’  and designed to return all investment over 5 years, as the project in Tomsk had proven possible. The primary social objective is to remove children, many of whom have died through malnutrition, from the misery of institutional care.

It proposes a ‘nil overall cost‘ strategy which will decrease the financial burden of the state:

“An inherent assumption about capitalism is that profit is defined only in terms of monetary gain. This assumption is virtually unquestioned in most of the world. However, it is not a valid assumption. Business enterprise, capitalism, must be measured in terms of monetary profit. That rule is not arguable. A business enterprise must make monetary profit, or it will merely cease to exist. That is an absolute requirement. But it does not follow that this must necessarily be the final bottom line and the sole aim of the enterprise. How this profit is used is another question. It is commonly assumed that profit will enrich enterprise owners and investors, which in turn gives them incentive to participate financially in the enterprise to start with.

That, however, is not the only possible outcome for use of profits. Profits can be directly applied to help resolve a broad range of social problems: poverty relief, improving childcare, seeding scientific research for nationwide economic advancement, improving communications infrastructure and accessibility, for examples – the target objectives of this particular project plan. The same financial discipline required of any conventional for-profit business can be applied to projects with the primary aim of improving socioeconomic conditions. Profitability provides money needed to be self-sustaining for the purpose of achieving social and economic objectives such as benefit of a nation’s poorest, neediest people. In which case, the enterprise is a social enterprise.”

The social business competion opportunity arrives the following year, when Erste Bank a Grameen Partner announces the Social Business Tour in Budapest and we introduce them to the ;Marshal Plan’ for Ukraine with this email exchange

.There’s a new player by 2009 in the form of the B Corporation and I introduce our work to them in a conversation with Hardik Savalai. We learn that a UK version of the B Corporation is not viable. Like P-CED, B Corporations propose amending the governing documents to reflect the interests of other than shareholders.

Around the same time in 2009, tuning into what Sir Richard Branson has said at the Davos Ukrainian Lunch, I began a conversation on this alternative approach with Virgin United, they appear to be disinterested.

In 2011 Erste Bank joined PwC , the British Council and USAID in a social enterprise development initiative for Ukraine, it made no provision for children in state care. .

Lat week, when UK immigration minister Mark Harper announces the 2012 Trafficking in Persons report, I was compelled to point out to him that we can’t hope to tackle the consequences of organised crime, if government behave just like them.     :

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One thought on “Friedman, shareholder primacy and beyond CSR

  1. Katya says:

    Well, I honestly and fairly inform you through, the media and e-business offer, back in 1997, I’m fan of this epistemology and humane economist Milton Friedman. .
    And you, you do not like it, Epistemology?
    Е, аз, коректно и лоялно Ви информирах, чрез медиите и чрез електронна фирмена оферта, още през 1997 година, че съм привърженичка на този гносеолог и хуманен икономист Милтън Фридмън. .
    А на Вас, не Ви ли харесва, гносеологията ?

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